Estimate of Economic Losses by Contract Growers in the

Poultry Sector due to COVID-19

May 14, 2020

Prepared by:

David Anderson John D. Anderson Texas A&M University University of Arkansas

Dennis Brothers Jeffrey Dorfman Auburn University University of Georgia

Kurt Guidry Jason E. Holmes Louisiana State University Louisiana State University

Josh Maples Jada Thompson Mississippi State University University of Tennessee

Julian Worley University of Georgia

Corresponding Author:

John D. Anderson

217 Agriculture Building

University of Arkansas

Fayetteville, AR 72701

Phone: 479.575.2281

Email: jda042@uark.edu

Staff Paper SP 01 2020

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Executive Summary

The sudden and severe losses in the poultry sector have raised legitimate concerns about the financial

viability of many contract grower operations. The purpose of this project is to provide an objective

assessment of aggregate losses attributable to COVID-19 in the poultry industry, focusing primarily on

assessing losses at the farm level in the broiler sector.

In the broiler sector, production losses in the 2nd through 4th quarters of 2020 are forecast to reach 2.58

billion pounds of live weight. Total loss in broiler industry value of production is anticipated to be $7.86

billion. Assuming an average grower payment of $0.0625 per pound produced, total losses to contract

growers from this decline in production are predicted to be $161.8 million. Estimating approximately

797 million square feet of barns in production, the $161.8 million in total damages equates to $0.20 per

square foot in grower damages.

In the turkey sector, total production losses were forecast to be 125 million pounds of live weight.

Assuming a $0.1025 payment per pound produced, the total losses to contract growers are projected to

be $12.84 million. Estimating approximately 45.6 million square feet of houses in production, the

$12.84 million in total damages equates to $0.28 per square foot in grower damages.

A disaster assistance payment delivered on a flat rate per-square-foot, while straightforward to

calculate and administer, would raise legitimate concerns about equitable treatment of growers.

Considerable variation exists across growers in contract terms (e.g., rate of compensation) and key

production parameters (e.g., bird weights, stocking density, average out-time between flocks). A single

flat-rate compensation would amount to substantially different levels of support when considered as a

percentage of lost farm-level revenue. For example, a grower with newer houses (typically implying a

higher pay rate) attached to a complex supplying large birds to the food service sector is probably

experiencing much higher losses than a grower with older houses attached to a complex supplying

smaller birds for grocery retail. In the former case, compensation of $0.20/square foot would probably

fall far short of making the grower financially whole while in the latter case it might more than cover

actual losses.

There are other compensation methods that would lessen the equitability concerns but also present

significant calculation and implementation challenges. In particular, accurate aggregate loss calculations

would not be feasible with publicly available data. For example, a per diem calculation would provide a

more direct method for compensating grower losses. This method would establish a net pay per day

value for grower operations. Growers would then be compensated for lost days of production based on

this value. The per diem approach to compensation is more complicated than a flat per-square-foot

payment; however, it would better match compensation to actual grower experience and could be

adapted to fit any situation in which a break in the normal production cycle causes extended out times.

We have provided discussion and considerations for possible compensation methods.

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Estimate of Economic Losses by Contract Growers in the Poultry Sector due to COVID-19

COVID-19 has created unprecedented disruptions in consumer markets for meat and poultry as well as

in the supply chain delivering these products. These disruptions have resulted in significant economic

losses for all industry participants, including for farmers.

The purpose of this project is to provide an objective assessment of aggregate losses attributable to

COVID-19 in the poultry industry, focusing primarily on assessing losses at the farm level in the broiler

sector. The sudden and severe losses in the poultry sector have raised legitimate concerns about the

financial viability of many contract grower operations. Many grower farms are highly leveraged due to

the high capital requirements of the enterprise. Even modest reductions in income or disruptions in

cash flow can compromise the ability of the operation to meet its financial obligations. Since much of

the financing for these operations is guaranteed through either the Small Business Administration (SBA)

or the USDA Farm Service Administration (FSA), the prospect of widespread business failures in the

sector has significant federal budget implications, even before considering the possibility of disaster

relief. In fact, it seems likely that if grower defaults do materialize, federal agencies will not only absorb

significant losses but will also, in short order, be asked to take on new loan guarantees in order to

rebuild needed capacity in the sector. In light of this very real possibility, it seems prudent to consider

policy alternatives that will help growers weather the current crisis, avoid defaults on guaranteed loans,

and maintain the existing productive capacity in the sector.

This task of estimating COVID-19-related losses in the poultry sector, particularly down to the grower

level, is complicated by a couple of key factors.

First, the COVID-19 event is obviously ongoing. Economics losses from the event will continue to mount

for some time. Thus, some portion of the economic damages herein estimated reflect forecasts that are

necessarily made with incomplete information and in an environment of heightened uncertainty due to

the unprecedented nature of unfolding events. Care will be taken to use the best, most objective data

currently available and to fully describe the basis of all forecasts, clearly identifying underlying

assumptions.

Second, the vast majority of production in the poultry industry takes place under contract. Farmer-

growers contract with integrators who provide birds, feed, veterinary products, and technical expertise.

Farmers provide facilities and equipment, labor, management, utilities, and other necessary inputs. Due

to the proprietary nature of these contractual arrangements, as well as to the fact that such

arrangements can vary considerably from one poultry company to another and often even within

companies, accurately determining how losses are shared among companies and growers is difficult.

Again, this work will rely on reasonable assumptions about typical contractual arrangements in the

industry, and such assumptions will be clearly identified where they are significant to the results

presented.

Finally, a substantial share of COVID-19-related losses in the poultry sector have been due to the loss of

food service business. The supply chain in the broiler sector for grocery retail and food service retail do

not completely overlap. Because of differences in preferred bird size, packaging, and related

characteristics, some production systems (either entire companies or units within companies) are

optimized for grocery sales while others are optimized for food service sales. Those participants in

production systems optimized for food service sales have likely experienced the most severe disruptions

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and, consequently, the greatest economic loss. Thus, parsing aggregate economic losses among

industry participants may not be a straightforward exercise.

To this point, there have been two significant events that have caused economic stress to contract

growers. The first was limitations placed on restaurants and other food service outlets as stay-at-home

directives and restrictions of movement began to surface throughout the country. Based on the latest

information available from the National Chicken Council, broilers sales to food service represents 45

percent of total sales or demand. Therefore, the restrictions placed on that industry segment quickly

created a significant reduction in demand to a vital component of overall demand structure for broiler

production. And while demand from the retail grocery segment has been much more stable, there are

longer term concerns regarding demand from that segment as additional consequences from a

downturn in the overall economy begin to materialize.

The other major event that occurred was the reduction in the industry’s processing capacity (Figure 1).

The COVID-19 virus began to impact the workforce of several processing facilities throughout the

Figure 1. Temporary Meat Plant Closures

country. This caused either a temporary reduction in processing ability for those facilities or, in some

cases, caused a complete shutdown of the facility. With processing capacity impacted, the normal

movement and flow of broilers through the production system was significantly altered. In some cases,

integrators were forced to euthanize birds on contract growers’ operations. While most contract

growers were compensated for the birds euthanized, proper disposal of the birds on site creates a

significant lag between those growers can obtain a new flock of birds. Since contract growers are only

compensated for their birds being grown in their facility, the increased time between flocks means less

overall revenue being generated by the contract grower.

In addition to having to euthanize birds, other strategies implemented by integrators to adjust

production to coincide with reduced processing capacity are to increase out-times (the time between

when the birds in a contract grower facility are marketed and when the grower receives a new flock of

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chicks to replace those marketed), reduce density (the amount of birds housed in a growing facility), and

reducing the target end weight of the birds. Each potential strategy has the effect of reducing the total

pounds of production that contract grower can generate in a given year. And, again, since the grower is

paid based on the number of birds and the pounds of production that is run through their facilities, this

reduction results in overall lower gross revenue generated by the operation.

A final implication of the reduction in processing capacity and reduced demand from the food service

segment of the industry is the disruptions caused in other segments of the integrated production

system. Pullet operations provide young hens to breeder flocks for egg production. These breeder

flocks, in turn, provide the eggs that become the broiler chicks that feed into the broiler operations.

With the reductions in broiler placement and production, there have been cases already reported of

integrators destroying millions of dozens of eggs in breeder flocks. Since contract breeder flock growers

are paid per dozen eggs produced and the hatch rate of those eggs, the downturn in demand caused by

the lower need for broiler chicks has and will likely continue to impact their overall revenue levels. Also,

with the reduction in the demand for eggs, the demand for young breeder hens from the pullet

operations is also impacted. Breeder operations could retain hens longer in their operations therefore

reducing the demand for replacement hens coming from pullet growers. And since contract pullet

growers are paid by the number of birds moved through their operations, their overall revenue has and

will likely continue to be impacted.

Overview of the Broiler Industry

The broiler industry is a significant component of the total agriculture economy in the United States.

Based on data from the USDA Economic Research Service (ERS), total cash receipts for the broiler

industry equaled $27.4 billion in 2019 and was originally estimated at $27.6 billion for 2020 prior to the

COVID-19 situation. These values represent more than 7 percent of the total cash farm receipts

generated in the United States from all commodities.

While the importance and relevance of the broiler industry is evident at the national level, it is even

more apparent at the state level. For many of the top broiler production states in the United States,

broiler production represents a top ten agricultural industry for that state. Table 1 shows every state in

which cash receipts for broiler production was reported in 2018. For each of the top ten states, broiler

production represented a significant component of total farm cash receipts for the state and resulted in

it being ranked as a top five commodity in the state in terms of cash receipts. In fact, broiler production

for 9 out of the top 10 states ranked as the single largest commodity in that state. Even for states with

overall smaller broiler industries, broiler production still represents a significant component of those

state’s total agricultural industry.

It is obvious that the broiler industry and the integrated production system that it entails is a significant

contributor to the overall agricultural economy both at the state and national level. The disruptions

being experienced both in typical demand outlets and throughout the normal production process have

both immediate and potential long-term impacts. Since contract growers are dependent on movement

of birds in and through their operations, the disruption of that normal flow has direct and significant

impacts on their revenue generating ability.

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Table 1. Cash Receipts for Broiler Production, 2018 Cash Receipts Percent of Total Broiler Production State (1,000 Dollars) State Cash Receipts State Rank Georgia $4,566,136 50.19% 1 Arkansas $4,089,868 45.26% 1 North Carolina $3,857,883 34.82% 1 Alabama $3,454,844 59.67% 1 Mississippi $2,633,505 48.16% 1 Texas $2,374,520 10.80% 3 Kentucky $1,102,069 18.68% 1 Delaware $1,075,684 76.37% 1 South Carolina $1,010,281 40.19% 1 Maryland $970,648 43.39% 1 California $965,340 1.94% 6 Virginia $935,431 26.57% 1 Missouri $819,215 8.08% 4 Oklahoma $737,097 10.91% 3 Pennsylvania $637,595 9.51% 4 Tennessee $525,292 14.97% 3 Louisiana $524,060 16.80% 2 Ohio $313,655 3.48% 8 Florida $215,718 2.95% 6 Minnesota $201,520 1.17% 12 West Virginia $176,924 25.84% 1 Indiana $150,373 1.43% 10 Wisconsin $127,899 1.17% 9 Washington $90,840 0.96% 10 Iowa $73,680 0.27% 10 Oregon $55,190 1.12% 10 Michigan $29,727 0.40% 14 Nebraska $22,744 0.11% 13 New York $5,650 0.11% 15 Illinois $2,842 0.02% 16 Source: USDA, Economic Research Service

Evidence of this disruption of the normal product flow throughout the integrated production process is

evident. Figure 2 shows weekly egg set over the previous three years, last year, and thus far in 2020. As

shown, weekly egg set experienced a significant downturn in the middle of April 2020. This reduction in

the number of eggs in inventory to produce the next group of broilers shows the industries reaction to

both reduced processing capacity and uncertainty regarding demand. Lower egg set has implications for

all segments of the production system. Contract breeder flock growers are producing fewer eggs and

generating lower revenues. In turn, there is less demand or need for young hens going into breeder

flock operations from the pullet operations. And finally, lower egg set means fewer broiler chicks

moving through contract broiler operations in the future.

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Data Source: USDA National Agricultural Statistics Service.

Figure 2. Weekly Broiler Egg Set

Similarly, Figure 3 shows weekly broiler placements. The reduction in broiler placements coincides

nearly identically with the reduction in egg set. Starting in the middle of April 2020, the number of

broilers placed declined significantly and remains at those low levels. As mentioned before, contract

broiler growers are only able to generate revenue when birds are moved in and through their facilities.

Fewer birds being placed into their facilities means fewer dollars available for those operations to

service their existing cost structure.

Data Source: USDA National Agricultural Statistics Service.

Figure 3. Weekly Broiler Chick Placements

200,000,000

205,000,000

210,000,000

215,000,000

220,000,000

225,000,000

230,000,000

235,000,000

240,000,000

245,000,000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

Nu

mb

er o

f Eg

gs

Week

3 Year Average 2019 2020

150,000,000

155,000,000

160,000,000

165,000,000

170,000,000

175,000,000

180,000,000

185,000,000

190,000,000

195,000,000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

Hea

d

Week

3 Year Average 2019 2020

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While information available from USDA on pullet placements is only reported on a monthly basis, similar

patterns can be seen in that data. Monthly pullet placements in February and March 2020 (the most

recent data available) show that placements in both months were down roughly 2 percent from the

three-year average. This is another indication of the overall disruption being experienced not only in the

broiler production segment of the industry but the entire integrated production process.

Finally, while available monthly slaughter data from USDA does not show similar reductions for total

slaughter as seen in some of the other production indicators, it does show sharp decreases for certain

classes of broiler slaughter, which may reflect the slowdown in demand from the food service sector

(see data in Appendix A). Also, monthly data from USDA was only available through March 2020 at the

time of this report which would not fully represent the impacts being experienced from the COVID-19

pandemic.

Sources of COVID-19 Losses

Similar to most industries in the current pandemic, the poultry sector has suffered from significant

disruptions in normal operations over the last three months, with disruptions likely to continue for

months to come. Coronavirus outbreaks led to closing of many restaurants, cafeterias, and schools,

which greatly altered demand for poultry products as not only total demand declined somewhat but the

mix of products demanded has been greatly impacted because the food service industry buys different

products in different packaging formats than supermarkets. Further, several processing plants have

reduced their output or temporarily closed due either to the decline in demand for specific products or

to infections within their workforce. While many plants have been largely unaffected, even staying at

full capacity, other plants are running well below capacity or have been closed for a time.

On the surface the poultry industry would appear to face many of the same complications as the rest of

the agricultural and food industry (a sudden, moderate decrease in total demand and a large shift in the

mix of products demanded), but poultry is different because it is a vertically integrated industry. This

vertical integration means one company, called the integrator, owns an entire chain of supply. This

supply includes the flocks which are raised by individual chicken farmers. These farmers, called contract

growers, are paid to raise the chickens to be ready for processing, but they do not ever own the birds.

Integrators are organized into complexes, consisting of breeding operations that supply chicks, contract

growers that raise the birds using feed supplied by the integrators and water, utilities, and houses paid

for by the grower, and processing plants that turn out a variety of products and packages. A problem

anywhere up or down this supply chain impacts all stages of poultry production. That means a

disruption in the market, like the current sudden collapse of demand for food service products, leads to

economic losses that are shared by both the integrators and contract growers.

There are four main channels through which revenue losses flow back to contract growers:

depopulation of flocks, longer out-times, reduced flock sizes, and lower target weights. The impact of

each of these sources of loss on growers will be discussed in turn.

Since some processing plants have been shut down due to COVID-19 outbreaks among workers, some of

the growers who would have supplied those plants have had to depopulate their flocks. Depopulation,

or euthanasia, of some flocks – as well as the subsequent composting of those birds – is a major loss of

revenue for these farmers, since they potentially lose the payment they would have received for raising

that flock after already having incurred some or all of the cost of raising the birds. While some

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companies have tried to compensate their growers for depopulated flocks, not all growers are being

compensated; and no growers are being paid the full amount they would have made from those flocks.

The amount of depopulation has been significant in some regions of the country, with some states

having as many as 3 million birds euthanized. Those numbers are expected to increase. Disposal of

carcasses is also a concern. Currently, some companies are requiring birds to be composted in-house

due to local health regulations, meaning the chicken houses cannot be used for another flock for a

minimum of 4-6 weeks.

This increase in out-time, or the time between flocks to be grown for processing, is the second cause of

serious revenue losses for contract growers, whether the time between flocks is increased because the

processing plant is closed or simply as a way for the integrator to try to match supply to the current level

and mix of demand. The out-time between flocks has increased in some regions to almost double the

usual period of 14-21 days between flocks, to an average of 30 days in affected areas and with some of

the hardest hit areas reporting triple the normal out-time, or up to 60 days. Since growers are only paid

when they are growing birds, it is easy to see how this delay between flocks can severely impact farm

revenues. While growers can reduce utility costs somewhat on an empty house, any payments on loans

taken to build and maintain their houses and equipment continue whether flocks are placed in their

houses or not.

The other two sources of loss for contract growers are similar to each other. With plants unable to

maintain a normal volume of production, poultry companies can limit their losses by reducing the

number of birds per house (i.e., lowering stocking density) or reducing the target weight at which these

birds are taken for processing. These two strategies, while perhaps necessary for integrators to manage

their supply chains, have similar negative impacts on grower revenues, as growers are paid per pound

produced. Thus, any decrease in the size of a flock or the birds will result in lower revenues and profits

for growers. Growers are currently experiencing reductions of about ten percent in flock size in affected

areas. It is also important to note that having five or ten percent fewer birds in a house doesn’t

significantly reduce the grower’s costs. The major variable expenses items, feed and medicine, are

supplied by the integrator (and are not paid for by the grower) while the building and utility costs are

essentially unchanged if a slightly smaller flock is placed in a house.

The rest of the supply chain for live birds has also been affected by COVID-19, although not as severely

as the grow-out sector. The breeder operations which supply eggs and chicks for the industry have

slowed production and even had to destroy eggs with the lag in demand for chicks at pullet, or young

female chicken, farms. The pullet farms likewise have seen a decrease in demand for birds as less

demand for birds to be grown out for processing means smaller demand for breeders to produce those

chicks.

To put these sources of loss in context, suppose a contract grower averages 5 flocks per year. If the

increase in out-times results in this farm receiving one fewer flocks per year, that equates to a 20%

reduction in annual revenue. Suppose that our grower delivers 218,750 pounds per house per flock

(31,250 birds at 7 pounds per bird) at a pay rate of $0.0625 per pound. The lost gross revenue from one

flock amounts to almost $15,000 per house. Under these same assumptions, a decrease in target

weight of one pound would result in a loss of almost $2,000 dollars per flock per house – or close to

$10,000 per house on a year’s worth of flocks. For a grower with eight houses, that is $80,000 in annual

lost revenue – from a one-pound smaller bird. As for reductions in flock sizes, a ten percent reduction in

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flock size would result in 3,125 fewer birds per flock, or a loss of about $1,500 per flock meaning $7,500

lower revenue per house per year.

Estimates of Industry Aggregate Losses

Broiler Growers

A sharp deterioration in the broiler industry financial situation has occurred as restaurant dining rooms

have shut down, processing plants have slowed operations, and the economy has fallen into recession.

In response, major integrators have sharply reduced the number of chicks placed for broiler grow-out in

the last few weeks (see Figure 3 above).

Estimated losses are developed using the May 2020 World Agricultural Supply and Demand Estimates

(WASDE) report (released on May 12, 2020) and the January 2020 WASDE from USDA World Agricultural

Outlook Board as a baseline (Figure 4). Baseline expectations were for broiler production to exceed that

of 2019. This analysis counts industry losses to have begun in earnest at the beginning of the second

quarter of 2020. Actual production in the first quarter was greater than expected in the January WASDE

report. Restaurant shutdowns and retail orders began in March, late in the first quarter. Losses are

expected to ease in the 4th quarter of the year.

Data Source: USDA World Agricultural Outlook Board.

Figure 4. Quarterly Broiler Production Forecasts: January and May World Agricultural Supply and

Demand Estimates (WASDE) Reports

Production losses in the 2nd through 4th quarters of 2020 are estimated to total 2.58 billion pounds of

live weight. Total loss in broiler industry value of production is estimated to be $7.86 billion. Assuming

an average grower payment of $0.0625 per pound produced, total losses to contract growers from this

decline in production are estimated to be $161.8 million. Industry production losses and grower

financial losses by quarter from 2020.Q2 through 2020.Q4 are summarized in Table 2.

10,000,000,000

10,500,000,000

11,000,000,000

11,500,000,000

12,000,000,000

Q1 Q2 Q3 Q4

Po

un

ds

January May

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Table 2. Expected Broiler Grower Live Weight Production Losses and Producer Damages

January 10th WASDE

Live Weight

Equivalent

May 12th WASDE Live

Weight Equivalent

Expected Production

Losses (pounds)

Expected Producer

Damages

Q2 15,067,813,088 14,005,764,588 (1,062,048,500) ($66,378,031)

Q3 15,565,648,322 14,536,788,838 (1,028,859,484) ($64,303,717)

Q4 15,167,380,134 14,669,544,900 (497,835,234) ($31,114,702)

Total 45,800,841,544 43,212,098,326 (2,588,743,218) ($161,796,451)

While acknowledging the substantial variation in grower-level losses most likely existing now,

disaggregating this estimate of industry losses provides useful context for policy considerations. To

simplify, we assume a stocking density of 0.85 square feet per bird, 5.8 flocks per year, and a 14-day

normal out-time between flocks. We also consider the 2019 average monthly broiler production of 768

million head obtained from the USDA Poultry Slaughter report. These assumptions and data suggest

approximately 797 million square feet of barns in production. The $161.8 million in total damages

equates to $0.20 per square foot in grower damages.

Turkeys

The same methodology using the January and May WASDE reports was employed to estimate losses to

the turkey industry. Total production losses were estimated to be 125 million pounds of live weight.

Assuming a $0.1025 payment per pound produced, the total losses to contract growers are estimated to

be $12.84 million (Table 3). To disaggregate this estimate, we assume a stocking density of 2.0 square

feet per bird, 3 flocks per year, and 14 days normal out-time. We also consider the average 2019

monthly turkey production of 18.97 million head obtained from the USDA Poultry Slaughter report.

These assumptions and data suggest approximately 45.6 million square feet of houses in production.

The $12.84 million in total damages thus equates to $0.28 per square foot in grower damages.

Table 3. Expected Turkey Grower Live Weight Production Losses and Producer Damages

January 10th WASDE

Live Weight

Equivalent

May 12th WASDE Live

Weight Equivalent

Expected Production

Losses (pounds)

Expected Producer

Damage

Q2 1,816,633,488 1,810,369,234 (6,264,253) ($642,085)

Q3 1,835,426,248 1,804,104,981 (31,321,267) ($3,210,429)

Q4 1,941,918,556 1,854,219,008 (87,699,548) ($8,989,203)

Total 5,593,978,292 5,468,693,224 (125,285,068) ($12,841,719)

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A Caveat

A number of caveats are in order and are addressed later in this report. One seems especially important

to note here. The computation of grower losses per square foot implicitly assumes that losses are

evenly distributed across all contract growers. That is clearly an oversimplification. It is inherently

difficult to assess the distribution of losses across growers. Even in normal times, there can be

considerable variation across growers in contract terms (e.g., rate of compensation) and key production

parameters (e.g., bird weights, stocking density, average out-time between flocks). During this COVID-

19 event, that variability has been amplified due to differences in the degree of supply chain disruption.

The food service supply chain has been more severely disrupted than the grocery retail chain. Growers

raising birds for food service have thus experienced more substantial losses than growers raising birds

for grocery retail. Even growers contracting with the same integrator may be experiencing widely

divergent outcomes right now depending on the supply chain that their particular production complex is

tied to. The bottom line is that a one-size-fits all compensation program will lead to some inequities.

For example, a grower with newer houses (typically implying a higher pay rate) attached to a complex

supplying large birds to the food service sector is probably experiencing much higher losses than a

grower with older houses attached to a complex supplying smaller birds for grocery retail. In the former

case, compensation of $0.20/square foot would probably fall far short of making the grower financially

whole while in the latter case it might more than cover actual losses.

Farm Level Compensation Possibilities

A number of possible payment mechanisms for contract poultry growers could be devised.

Compensation for Longer Out-Times

Per Diem Payment: Arguably, the most direct method for compensating grower losses is with a per diem

calculation based on lost days of production. The benchmark for days in production and for the value of

that production could be the grower’s own past settlement history or a running average based on

settlements across all farms in a given production complex. Regardless of how payments are calculated,

distributions should be made on a per-affected-contract basis since a single grower may have multiple

contracts.

To calculate a per diem payment, the grower’s total net pay per day would be calculated for some

number of past flocks (for example, four to six, representing a typical year of production) by dividing the

grower’s total settlement by the number of days birds were in the house and reducing that gross

amount by a fixed percentage to represent variable costs (e.g., 30%).

1) NPD = (TS / DB)(1-VC%)

Where

NPD = Total Net Pay per Day for the baseline period,

TS = total value of settlement received by the grower over the baseline period,

DB = total number of days of that year with birds in house, and

VC% = variable costs of production as a percent of total settlement.

Lost days of production could be compensated at the calculated NPD rate.

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Example:

Suppose a grower’s one-house average placement rate is for 31,250 birds with an average flock length

of 49 days, an average pay weight of 7 pounds, and a pay rate of $0.06 per pound of live weight.

With variable costs assumed to amount to 30% of the grower’s gross settlement, the grower’s NPD

would be calculated as follows:

2) NPD = {(31,250 birds * 7 lb * $0.06/lb) / 49 days} * 0.7 = $187.50.

If COVID-19 impacts result in a total of 30 days of above-baseline out-time, the grower’s payment would

be:

3) $187.50/day * 30 days = $5,625/house, or $22,500 on a 4-house contract.

The per diem approach to compensation would fit any situation in which a break in the normal

production cycle causes extended out times. This approach could also be readily adapted to

compensate growers of breeder hens and pullets based on their typical settlement terms and variable

expense ratios.

Per Square Foot Payment: As illustrated in the previous section, it is possible to convert estimated losses

to a per-square-foot basis for grower payment. Using the example above, if the grower losses of

$22,500 were incurred on 4 houses totaling 100,000 square feet of floor space, the one-time per-

square-foot payment to the grower would be about 22.5 cents. The appeal of this method is that it

provides a reasonably straightforward method of decomposing aggregate losses to a single farm-level

payment rate, as illustrated in the previous section using a handful of basic assumptions. While this

simplicity is appealing, there are a couple of problems with this approach. First, obtaining an estimate

of industry square footage is not necessarily a straightforward process. It is unlikely that such data could

be obtained directly, and any method for estimating it will require assumptions that would be difficult to

validate. Second, this approach raises legitimate concerns about equity among growers. As noted, not

all growers are paid at the same rate. Many integrators pay a higher rate to growers with newer, more

productive houses. These are also the growers most likely to need assistance as a result of lost revenue

in order to continue to service debt on their facilities and equipment. A common payment rate per

square foot would actually result in substantially different levels of compensation among growers as a

percentage of lost revenue.

Compensation for Slower Grow-Outs or Reduced Weights

For production losses caused by slowing down birds or early catch, a similar formula to 1) could be used

but with no adjustment to remove variable costs. This calculation would account for differences in total

number of birds delivered and/or bird weights between the defined baseline period and the period over

which losses are calculated. It is worth noting, however, that these types of changes in operations occur

often in a normal year as integrators decide to catch early or late according to market forces or local

plant issues. These limited changes are normally part of the contract. If a grower can illustrate in their

specific situation that they have been damaged by the integrator’s decisions, they have redress

pathways in the contract.

Compensation for Flock Depopulation

Some farms will be unable to deliver birds to processing plants in a timely manner so that those flocks

must be euthanized. Compensation for the birds grown but not delivered for processing per normal

14

operation is generally handled through the contract with the integrator. Common practice in the

industry is for growers in this circumstance to be paid according to a complex average or according to

the grower’s previous 5-6 flock average. Thus, growers should not generally suffer total losses of

income for such flocks. If in some specific cases growers are not compensated, the per diem formula

presented above provides an appropriate method for calculating compensation for birds. Alternatively,

growers could simply be paid for a lost flock (or proportion of a lost flock) according to their average

payment for past flocks.

Growers facing flock depopulation may also have to deal with additional costs associated with bird

disposal. Mortality disposal is typically the contractual responsibility of the grower regardless of the

cause of mortality. In a mass euthanasia event, in-house composting and litter disposal is often the only

practical method. In some cases, integrators may help with this expense. If not, a fixed payment to the

grower based on a square footage rate could be offered to cover disposal costs. Finally, depopulation

events, especially with in-house composting, will almost certainly result in extended out-times for

affected growers. Lost income due to these extended out-times could be covered by a per diem

payment as discussed earlier.

Cost for litter disposal could be incurred in some areas, as well as long-term litter storage costs. These

costs would fall mostly on the individual growers. A set amount per affected contract would be the most

efficient method to deliver relief in this area. Litter storage or disposal costs will vary greatly by region;

therefore, a locally generated average cost should be considered.

Complicating Factors

Integrator Compensation: One factor complicating the development of equitable compensation

programs for contract poultry growers is the varied experience of growers with their integrators.

Approximately half of integrators already have some contractual form of emergency grower

compensation in place. These payments may come in many forms. They typically only apply to losses

that the grower suffered due to no fault of their own and that ultimately originated somehow within the

operations of the integrator. However, some contracts are more liberal than others in designating the

causes of loss. In the present crisis, this means that some integrators will liberally characterize losses

and will thus compensate their growers as a matter of good faith. Others will determine that they have

no responsibility in causing the business interruption/losses for the grower and will thus not

compensate their growers. Moreover, the economic reality of the current situation is that some

integrators are also absorbing massive losses and may not be financially able to assist growers. In any

case, when compensation is offered by integrators, it will most likely resemble something like the per

diem payment illustrated earlier.

Small Business Administration Loan Forgiveness: A significant number of loans to contract poultry

growers are now originating with or, more commonly, guaranteed by the Small Business Administration

(SBA). Those loans now qualify for SBA’s debt relief efforts under the Coronavirus Aid, Relief, and

Economic Security (CARES) Act. This means that contract growers with SBA loans will have six months of

principal, interest, and any associated fees on their loans paid directly by SBA. By contrast, contract

growers with unguaranteed commercial loans or with loans or guarantees through USDA Farm Service

Administration (FSA) will not, at this point, be receiving similar debt relief. Of course, debt relief from

any source would not impact growers whose facilities and equipment are already paid off.

15

Project Contributors

David Anderson Professor and Extension Economist

Agricultural Economics

Texas A&M University

John D. Anderson Professor & Head

Agricultural Economics & Agribusiness

University of Arkansas

Dennis Brothers Associate Extension Professor

Agricultural Economics & Rural Sociology

Auburn University

Jeffrey Dorfman Professor

Agricultural & Applied Economics

University of Georgia

Georgia State Fiscal Economist

Kurt Guidry Gilbert Durbin Professor

Agricultural Economics & Agribusiness

Director, LSU AgCenter Southwest Region

Louisiana State University

Jason E. Holmes County Agent and Regional Livestock Specialist

Louisiana State University

Josh Maples Assistant Professor and Extension Economist

Agricultural Economics

Mississippi State University

Jada Thompson Assistant Professor

Agricultural and Resource Economics

University of Tennessee – Knoxville

Julian Worley Graduate Research Assistant

Agricultural & Applied Economics

University of Georgia

16

Appendix A

Monthly Chicken Slaughter Data, USDA-NASS

CHICKENS, MATURE, HEAVY, SLAUGHTER, FI - SLAUGHTERED, MEASURED IN HEAD

Month 2017 2018 2019 3 Yr Avg 2020 % of Avg.

JAN 6,087,000 6,587,000 6,968,000 6,547,333 6,970,000 106.5%

FEB 5,627,000 5,783,000 6,132,000 5,847,333 6,289,000 107.6%

MAR 6,308,000 6,210,000 6,335,000 6,284,333 7,077,000 112.6%

APR 5,537,000 6,233,000 6,490,000 6,086,667

MAY 6,352,000 6,862,000 7,046,000 6,753,333

JUN 7,073,000 7,238,000 6,947,000 7,086,000

JUL 6,244,000 7,160,000 6,179,000 6,527,667

AUG 7,392,000 8,099,000 7,404,000 7,631,667

SEP 6,392,000 6,312,000 7,173,000 6,625,667

OCT 7,269,000 7,528,000 7,050,000 7,282,333

NOV 6,673,000 6,684,000 6,468,000 6,608,333

DEC 6,074,000 5,399,000 6,228,000 5,900,333

CHICKENS, MATURE, LIGHT, SLAUGHTER, FI - SLAUGHTERED, MEASURED IN HEAD

Month 2017 2018 2019 3 Yr Avg 2020 % of Avg.

JAN 4,993,000 3,601,000 3,392,000 3,995,333 3,126,000 78.2%

FEB 4,910,000 3,631,000 2,576,000 3,705,667 2,931,000 79.1%

MAR 5,719,000 4,221,000 3,068,000 4,336,000 3,301,000 76.1%

APR 5,054,000 4,290,000 3,159,000 4,167,667

MAY 5,570,000 4,288,000 3,068,000 4,308,667

JUN 5,248,000 3,987,000 2,608,000 3,947,667

JUL 4,349,000 3,997,000 2,889,000 3,745,000

AUG 4,778,000 3,898,000 2,800,000 3,825,333

SEP 4,139,000 3,306,000 2,641,000 3,362,000

OCT 4,089,000 4,183,000 3,085,000 3,785,667

NOV 4,490,000 3,477,000 2,570,000 3,512,333

DEC 4,252,000 3,432,000 2,730,000 3,471,333

17

CHICKENS, MATURE, SLAUGHTER, FI - SLAUGHTERED, MEASURED IN HEAD

Month 2017 2018 2019 3 Yr Avg 2020 % of Avg.

JAN 11,080,000 10,188,000 10,360,000 10,542,667 10,096,000 95.8%

FEB 10,537,000 9,414,000 8,708,000 9,553,000 9,220,000 96.5%

MAR 12,027,000 10,431,000 9,403,000 10,620,333 10,378,000 97.7%

APR 10,591,000 10,523,000 9,649,000 10,254,333

MAY 11,922,000 11,150,000 10,114,000 11,062,000

JUN 12,321,000 11,225,000 9,555,000 11,033,667

JUL 10,593,000 11,157,000 9,068,000 10,272,667

AUG 12,170,000 11,997,000 10,204,000 11,457,000

SEP 10,531,000 9,618,000 9,814,000 9,987,667

OCT 11,358,000 11,711,000 10,135,000 11,068,000

NOV 11,163,000 10,161,000 9,038,000 10,120,667

DEC 10,326,000 8,831,000 8,958,000 9,371,667

CHICKENS, SLAUGHTER, FI - SLAUGHTERED, MEASURED IN HEAD

Month 2017 2018 2019 3 Yr Avg 2020 % of Avg.

JAN 760,368,000 782,455,000 798,458,000 780,427,000 830,281,000 106.4%

FEB 690,221,000 703,202,000 706,552,000 699,991,667 726,073,000 103.7%

MAR 783,661,000 753,248,000 740,331,000 759,080,000 818,309,000 107.8%

APR 700,938,000 741,597,000 768,091,000 736,875,333

MAY 794,438,000 805,212,000 813,274,000 804,308,000

JUN 775,332,000 756,015,000 749,607,000 760,318,000

JUL 736,363,000 786,195,000 823,511,000 782,023,000

AUG 821,855,000 834,864,000 815,546,000 824,088,333

SEP 738,887,000 728,624,000 776,646,000 748,052,333

OCT 794,358,000 831,667,000 859,145,000 828,390,000

NOV 739,470,000 739,229,000 721,361,000 733,353,333

DEC 714,811,000 698,602,000 766,727,000 726,713,333

18

CHICKENS, YOUNG, SLAUGHTER, FI - SLAUGHTERED, MEASURED IN HEAD

Month 2017 2018 2019 3 Yr Avg 2020 % of Avg.

JAN 749,288,000 772,267,000 788,098,000 769,884,333 820,185,000 106.5%

FEB 679,684,000 693,788,000 697,844,000 690,438,667 716,853,000 103.8%

MAR 771,634,000 742,817,000 730,928,000 748,459,667 807,931,000 107.9%

APR 690,347,000 731,074,000 758,442,000 726,621,000

MAY 782,516,000 794,062,000 803,160,000 793,246,000

JUN 763,011,000 744,790,000 740,052,000 749,284,333

JUL 725,770,000 775,038,000 814,443,000 771,750,333

AUG 809,685,000 822,867,000 805,342,000 812,631,333

SEP 728,356,000 719,006,000 766,832,000 738,064,667

OCT 783,000,000 819,956,000 849,010,000 817,322,000

NOV 728,307,000 729,068,000 712,323,000 723,232,667

DEC 704,485,000 689,771,000 757,769,000 717,341,667